Information exchange

The first wave of automatic Common Reporting Standard (CRS) information exchanges has just begun between 49 countries, according to an OECD announcement on September 15. The 49 countries include Argentina, Barbados, Belgium, Bermuda, BVI, Cayman Islands, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Isle of Man, Italy, Liechtenstein, Luxembourg, Malta, Mexico, Norway, Poland, Portugal, Romania, Slovak Republic, South Africa, Spain, Sweden, Turks and Caicos Island and the UK. The OECD comments that this “marks the delivery on their political commitment to fight tax evasion.”

Background

In 2014, the OECD and the G20 approved the CRS, which as the basis for automatic annual exchange of information on offshore financial accounts to the tax authorities of the residence country of account holders. At present, 102 jurisdictions have publicly committed to implement the CRS, with 49 being committed to start now and a further 53 countries, including Israel, in a second wave in September 2018.

Missing from all this is the United States. That is because the US has already instituted its own parallel system of information exchange relating to US persons and US financial institutions, known as FATCA -Financial Account Tax Compliance Act. The US has intergovernmental agreements with 113 countries including Israel.

The implementation of the CRS requires both domestic legislation to ensure that financial institutions correctly identify and report accounts held by non-residents, and an international legal framework for the automatic exchange of CRS information. The main route chosen to put the international legal framework in place is through the CRS Multilateral Competent Authority Agreement (CRS MCAA). At present, 95 jurisdictions have signed the CRS MCAA, including Israel.

While the CRS MCAA is a multilateral agreement, exchange relationships for CRS information are bilateral in nature and are activated when both jurisdictions have the domestic framework for CRS exchange in place and have listed each other as exchange partners.

Status

All 49 countries in the first wave activated their exchange relationships and the network of bilateral exchange relationships now covers over 99% of the total number of possible exchange relationships.

In addition, 20 of the 53 jurisdictions committed to first exchanges in 2018 have already put the international legal requirements in place to commence information exchanges next year. A further activation round for jurisdictions committed to a 2018 timeline is scheduled to take place in November 2017 which will allow the remaining jurisdictions to nominate the partners with which they will undertake automatic exchanges of CRS information.

In total, there are now over 2000 bilateral relationships for the automatic exchange of CRS information in place across the globe.

And in Israel

In Israel, the Israeli Tax Authority is happily implementing the CRS. But the Bank of Israel (BOI) also plays a star role.

On October 7, 2016, Israel made tax evasion a predicate money laundering offense. This means the Israeli banks must now watch out for tax evasion in Israel and abroad by account holders. The banks have become the tax Police.

The Bank of Israel issued tough stipulations to the Israeli banks, in a Circular dated November 23, 2016, especially regarding bank transfers to and from Israel.

This Circular emphasizes that tax offenses may now be money laundering. With regard to income tax, the following are money laundering offenses if the income is over NIS 1 million in one year or NIS 2.5 million over 4 years: income omitted from a tax return; false tax return, false answer, false books, fraud, or presenting a false withholding tax certificate to a payor. But the BOI takes the position that no minimum threshold applies to risk assessment by banks.

The banks are instructed to: review KYC (know your customer) procedures if there is difficulty identifying control holders or use of trusts, especially in a real estate purchase, and to watch out for certain red flags.

Red flags

The above Circular lists 18 red flags. They include: foreign company with similar name; many large movements to or from an offshore jurisdiction; cash deposits or withdrawals close to the thresholds; circular flows; uncharacteristic acts; Israeli power of attorney holder for a foreign resident; numbered or coded accounts; offshore company controlled by an Israeli resident or with an Israeli resident signatory; back to back loans; concealment of dual citizenship or taxability; non-disclosure of residency; hold mail; customer refuses to be contacted (unless in country lacking relations with Israel); account closed because rules tightened or the bank requested more tax information; higher than normal interest in tax matters; non-disclosure of source of wealth or income; or, the customer can’t confirm or prove that his wealth or income was lawfully reported.

Consequences of a red flag

If a red flag or other exceptional activity is spotted, the bank must ask the customer for an explanation.

If the customer does not respond to this request and the bank has reasonable ground to believe money laundering (including tax evasion) has occurred, the bank may deny service and report the irregular act to the competent authority (Circular 411, Section 24). As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd